Chapter 7 bankruptcy and the means test

In our last post, we began speaking about Chapter 7 bankruptcy and its benefits, as well as its limitations. As we noted, one of the limitations of this form of bankruptcy is that debtors must meet the financial qualifications. This involves the so-called means test.

First of all, not all debtors considering Chapter 7 bankruptcy must submit to the means test. In particular, disabled vets who carry debt while on active duty or who performed homeland defense activities do not have to pass the means test, nor do debtors whose debt primarily comes from the operation of a business.

As to the test itself, the basic formula is to measure the average monthly income of the debtor for the past six months against the median income for the state in which the bankruptcy filing is made. An income which is not more than the state median generally qualifies a debtor to file for Chapter 7 bankruptcy. In 2015, the median income in Louisiana for a family of four is $69,514.

That being said, qualification for bankruptcy is also dependent on the amount of income a debtor would have after repaying creditors in a Chapter 13 bankruptcy. If the amount is sufficient, the bankruptcy can be converted to a Chapter 13 bankruptcy. Debtors who earn more than the state’s median income could still qualify for Chapter 7 bankruptcy, though, if their disposable income is not enough to pay some of their unsecured debt in a Chapter 13 bankruptcy plan.

Generally speaking, debtors who fail the means test are not eligible for Chapter 7 bankruptcy, but bankruptcy judges may still allow the filing to go forward under special circumstances. Those who feel they constitute a special case should work with an experienced bankruptcy attorney to make sure they have the best shot at filing for a Chapter 7 bankruptcy, as well as to have guidance throughout the rest of the process.